Financial Statements What are They?
The business world is currently heading towards the globalization process, companies must be agile and effective in the decision-making process, in which the financial statements play a very important role by issuing essential data used in the administration for the development of the company.
Business executives and managers need up-to-date financial information to make appropriate decisions about future operations.
Accounting prepares general economic information about the entity, this information is presented in the various financial statements ranging from the balance sheet, income statement, statement of changes in equity, and statement of cash flows, to economic notes and explanatory material.
The 2 fundamental characteristics of financial information
From the simplest report to the important financial statements of the company, they must be characterized primarily by:
#1.Utility
The information contained in the statements of the company must be adapted to the needs and purpose of the users, including shareholders, investors, creditors, workers, suppliers, the government, and society in general.
#2.reliability
They must accurately reflect financial data of the performance and what happens in general with the finances of the company.
What are financial statements?
Simply, financial statements or accounting statements are a formal record of the financial activities of the company, person, or entity.
In detail, they are a report that summarizes and shows the user that a company has made of the economic funds contributed by shareholders and creditors for a given period and according to this, what would be its current financial situation.
It is a basic principle for companies to show financial statements that adhere to the general accounting principles accepted internationally to maintain the continuity and uniformity of criteria and the information presented since these statements are also frequently audited by government agencies, firms, and accountants. , among others, to ensure accuracy and to review the payment of taxes, financing, or investment.
In general, the three basic financial statements are:
- The balance sheet, which shows the assets, liabilities, and equity of the company.
- The income statement, which shows the net income and how it is obtained in a given period.
- The cash flow statement, which outlines the inflows and outflows of cash produced during the period in question.
The usefulness of financial information
The information displayed in the financial statements is useful for:
- The administration Facilitates and supports decision-making, thanks to the fact that it makes known the growth, performance, and development of the company during a certain period.
- The owners: Provides accurate information that allows you to be aware of the profitability of your contributions and the financial progress of the business.
- Creditors: It helps them to know the liquidity of the company as a guarantee of compliance with their obligations towards them.
- The status: To check if the payment of contributions and taxes has been correctly settled.
How can be the financial statements?
Depending on the intended use, they can be:
Projected financial statement
Carried out at a future date or period, based on calculations and estimates of operations that have not yet been carried out. It usually accompanies a budget, it is a proforma state.
Audited financial statement
They have gone through the review and verification carried out by independent public accountants, who finally formulate an opinion on all the information and the financial situation of the company.
Consolidated financial statement
They are those published by legally independent companies, they expose the financial situation and the utility as a single legal entity.
Types of financial statements
Balance sheet
It is the accounting document that reports the financial situation of the company, clearly demonstrating the value of its properties, obligations, and capital, valued by accounting principles.
It consists of two parts
- Assets: Shows the assets of the company,
- Liabilities: Details your financial origin.
The legislation requires the veracity of this document and is a true image of the equity status of the company.
Only real accounts appear on the balance sheet and their values must correspond promptly to the balances recorded in the general ledger and auxiliary books.
The balance sheet is prepared once a year and dated on the culmination day of the year, it must be signed by those responsible for the administration of the company such as the accountant, a fiscal auditor or auditor, and the manager who assumes all responsibility of the information exposed, if it were a company, the balance must be exposed and approved at the general shareholders’ meeting.
Income statement or profit and loss
It is a document where detailed and consecutive information is gathered on how the profit for the accounting year was obtained and shows the result of the company’s operations, that is, the profit or loss in a given period.
It is made up of the nominal accounts and the accounts of income, expenses, and costs. The reflected values must correspond to the values recorded in the general ledger and its auxiliaries.
Statement of cash flows
It incorporates cash movements, in conjunction with sales and expenses that are not always paid and collected instantly. It represents the cash flow of the company and is related to the flows calculated for the valuation of investments.
It is a sign of the financial solvency of the company and its ability to pay.
To prepare it, the starting point is the net profit and the dimensions are adjusted according to the sales receivable and unpaid expenses.
Statement of Changes in Equity
It is the financial statement that shows in detail the contributions of the partners and the distribution of the profits obtained in a period, in addition to the application of the retained earnings in previous periods.
It also shows the difference between stockholders’ equity (equity) and social capital (shareholders’ contributions), determining the difference between total assets and total liabilities, including shareholders’ contributions in liabilities.
